International Tax Blog

Barnes Group - Structured Repatriation Was a Dividend

Last month the Tax Court issued its opinion in Barnes Group, Inc. v. Commr., T.C. Memorandum 2013-109.

In the case, Barnes indirectly owned 100% of ASA, a Singapore controlled foreign corporation. ASA had excess cash that Barnes wanted to repatriate to the U.S. However, Barnes would have had to pay U.S. tax if ASA had distributed the cash as a dividend to Barnes, or if ASA had loaned the cash to Barnes.

Barnes sought advice from multiple advisors looking for methods to repatriate the cash without paying U.S. tax. After rejecting advice from Ernst & Young and Deloitte Touche, Barnes spoke with PriceWaterhouseCoopers (“PwC”). PwC suggested a plan in which the cash could be repatriated in a tax free manner through two Code §351 exchanges.

In the first Code §351 exchange, ASA and Barnes transferred cash to a Bermuda corporation (“Bermuda”) in exchange for Bermuda stock. In the second Code §351 exchange, Bermuda transferred cash and Barnes transferred Bermuda common stock to a Delaware corporation (“Delaware”) in exchange for Delaware stock. Delaware then loaned the cash to Barnes.

Although Bermuda’s ownership of shares in Delaware was an investment in U.S. property under Code §956, the taxpayer argued that Bermuda’s basis in the Delaware shares was zero (under Rev. Rul. 74-503) and that the 956 inclusion should therefore be zero.

The Tax Court held that the cash that started at ASA and ended at Barnes was in substance a dividend and was taxable to Barnes under Code §301.  Shown below is a chart of the case (here for PDF of Barnes):

  

10 Free New Tax Charts (Feburary 2012)

Last week we added 10 free charts to www.andrewmitchel.com, including 4 charts previously published on this blog.  The recently added charts can be found here. 

The charts include the following:

1. Dagres (Business Bad Debt Deduction for Private Equity Fund Manager)
2. Goosen (Golfer Endorsement Fees: Part Royalties & Part Services, Part U.S. Source Part Foreign Source)
3. Rev. Rul. 86-138 (Separate Statement of Items for Tiered Partnerships)
4. PLR 201122002 (Migration, “Uncheck” of DE & Downstream Merger into DE Treated as F Reorganization)
5. Reg. 1.301-1(f), Example 1 (Section 301 Distribution Greater Than E&P and Stock Basis)
6. Reg. 1.301-1(f), Example 2 (Section 301 Distribution Less Than E&P Results in Dividend Only)
7. Reg. 1.356-1(d), Example 1 (Stock Exchanged for Stock Plus Boot - Gain)
8. Reg. 1.356-1(d), Example 2 (Stock Exchanged for Stock Plus Boot - Loss)
9. Reg. 1.356-3(c), Example 2 (Excess Principal Treated as “Other Property” (i.e., Boot))
10. Reg. 1.897-1(d)(2)(i), Example (Loan With “Kicker” is a USRPI)

Loan With “Kicker” is a USRPI

Treas. Reg. §1.897-1(c) defines the term “United States real property interest” (“USRPI”) to mean any interest, other than an interest solely as a creditor, in either: (i) real property located in the United States or the Virgin Islands, or (ii) a domestic corporation unless it is established that the corporation was not a U.S. real property holding corporation within the period described in section 897(c)(1)(A)(ii).

Treas. Reg. §1.897-1(d)(2) provides that an interest in real property other than an interest solely as a creditor includes a fee ownership, co-ownership, or leasehold interest in real property, a time sharing interest in real property, and a life estate, remainder, or reversionary interest in such property.  

The term also includes any direct or indirect right to share in the appreciation in the value, or in the gross or net proceeds or profits generated by, the real property.  A loan to an individual or entity under the terms of which a holder of the indebtedness has any direct or indirect right to share in the appreciation in value of, or the gross or net proceeds or profits generated by, an interest in real property of the debtor or of a related person is, in its entirety, an interest in real property other than solely as a creditor.

The regulations include an example of where a loan that shares in the appreciation in the value of the real property is treated as a USRPI.  The chart below demonstrates the example (click on the chart to enlarge the image):

Goosen v. Commr. - Golfer Endorsement Fees

In a recent Tax Court case, 136 T.C. No. 27 (2011), the court was asked to determine the U.S. taxation of certain endorsement fees and bonuses received by a professional golfer --- Retief Goosen (a.k.a. the “Iceman”).

Goosen received golf tournament prize winnings as well as on-course and off-course endorsement fees.  For U.K. tax purposes, Goosen’s income was paid to two corporations in which he entered into employment agreements.  A portion of this income was then paid to him as a salary.

The Tax Court had to first determine whether the endorsement fees would fall within the category of royalty income or personal services income.  After deciding the type of income, the court had to determine the source of the royalties and services income.  Next, the court had to determine whether the different streams of income were effectively connected to a U.S. trade or business.  Lastly, for the U.S. source royalties that were not effectively connected income, the court had to determine whether the U.K.-U.S. Income Tax Treaty would apply to reduce the 30% U.S. tax on the royalties.

Below is a chart which shows the types of income earned by the Iceman and how the court held each type of income should be treated.  A PDF version of the chart can be found at Goosen.

Dagres - Ordinary Loss for Bad Debt of Private Equity Fund Manager

Below is a chart of a recent Tax Court case.  The Tax Court described in detail the structure of typical private equity fund, with a 2% fee and a 20% profits interest being received by the fund managers.  A PDF version of the chart can be found at Dagres.



10 Free New Tax Charts (June 2011)

Today we added 10 free charts to www.andrewmitchel.com.  The recently added charts can be found here.  The charts include the following:

1. Soreng (Disproportionate Circular Flow of Cash Not Disregarded)
2. Rev. Rul. 68-183 (Sale to Trust Treated as Contribution to Trust)
3. Rev. Rul. 69-142 (B Reorganization Treated As Separate From Exchange of Debentures)
4. Rev. Rul. 69-608, Situation 1 (Constructive Dividend for Corporate Assumption of Shareholder Liability)
5. Rev. Rul. 76-454 (Constructive Dividend as Part of 351 Exchange)
6. Rev. Rul. 2007-42 Situation 2 (Failed Spin-Off - 20% Interest in Partnership)
7. Notice 2007-57 (Loss Importation Listed Transaction)
8. Rev. Rul. 2008-31 (Notional Principal Contract Was Not a USRPI)
9. PLR 201106003 (CFC/PFIC Overlap Rule For a U.S. Partnership)
10. Section 304(b)(5)(B) (Anti-abuse Rule for Redemptions of U.S. Corporations in Foreign Sandwich Structures)

10 Free New Tax Charts (Jan. 2011)

Today we added 10 free charts to www.andrewmitchel.com.  The recently added charts can be found here.  The charts include the following:

1. Rev. Rul. 69-265, Situation 1 (Stock Convertible Into Parent Shares Busted Triangular C Reorganization)
2. Rev. Rul. 70-271, Situation 1 (C Reorg: Gain on Stock Used To Discharge Liabilities)
3. Rev. Rul. 85-13 (Grantor Trust Not Treated as Separate Entity)
4. Reg. 1.707-1(c), Example 1 (Fixed Guaranteed Payment For Services)
5. Reg. 1.707-1(c), Example 3 (Fixed Guaranteed Payment & 30% of Loss)
6. Reg. 1.861-4(b)(1)(ii), Example (Compensation For Services Sourced Based on Payroll Costs)
7. Reg. 1.861-18(h), Example 1 (Shrink-Wrap License Sold on Disk Treated as Copyrighted Article)
8. Reg. 1.861-18(h), Example 3 (Use of Computer Disk for 1 Week Treated as Lease of Copyrighted Article)
9. Reg. 1.861-18(h), Example 5 ("License" For 3 Annual Payments Treated as Sale of Copyright Rights)
10. PLR 200952032 (Divisive C Reorganization)

10 Free New Tax Charts

Today we added 10 free charts to www.andrewmitchel.com.  The recently added charts can be found here.  The charts include the following:

1. Canal Corp. (Disguised Sale to Partnership Under Section 707(a)(2)(B))
2. Forsythe (Special Allocation Allowed Only to the Extent of EROL)
3. Proctor & Gamble (Japanese Withholding Taxes on Royalties Related to Korean Sales Were Not Compulsory Payments)
4. Rev. Rul. 78-408 (B Reorganization Treated As Separate From Exchange of Warrants)
5. Rev. Rul. 84-68 (Parent Payment of Bonuses to Subsidiary Employees)
6. Reg. 1.881-3(e), Example 10 (No Reduction in Tax, Cascading Royalties)
7. Reg. 1.1441-7(f)(2)(ii), Example 1 (Withholding Required For Conduit Financing Arrangement)
8. PLR 200832024 (No 956 Inclusion For Foreign Partnership With U.S. Assets)
9. PLR 201014049 (Parent Stock Transferred to Foreign Subsidiary in 1032 Exchange)
10. Example of Foreign Tax Credit “Splitter” Structure

New Section 956 Foreign Tax Credit Blending Rule

Earlier this week, President Obama signed into law H.R. 1586.  This new law has several important changes to U.S. international tax rules.  Today’s blog post discusses the new Section 956 foreign tax credit blending rule.

The new law adds a new subsection (subsection (c)) to Code § 960.  Under this new rule, if there is a Section 956 inclusion where the U.S. shareholder will be allowed to claim deemed paid foreign tax credits (i.e., a “qualified group” exists), the amount of the deemed paid foreign tax credits can be limited.

Under the new rule, if the amount of the deemed paid foreign tax credits under the normal “hopscotch” rule would exceed the deemed paid foreign tax credits if cash (in an amount equal to the Section 956 inclusion) were distributed in a series of distributions through the chain of ownership, then the deemed paid foreign tax credits will be limited to the amount calculated under the hypothetical cash distribution.

For example, if a lower-tier foreign subsidiary (“CFC2”) had a high tax pool of earnings and a first-tier foreign subsidiary (“CFC1”) had a low tax pool of earnings, under the old rules the U.S. Parent could access the high tax pool of earnings and could bypass the low tax pool of earnings by making a 956 loan from CFC2 to the U.S. Parent.

Under the new rule of Code § 960(c), U.S. Parent would only be able to claim foreign tax credits equal to the amount that would have been allowed if a cash distribution was made from CFC2 to CFC1, and then a cash distribution was made from CFC1 to U.S. Parent.  In other words, U.S. Parent cannot claim deemed paid foreign tax credits based solely on the earnings pool of CFC2, but instead must base the deemed paid foreign tax credits on CFC1’s earnings (after considering the hypothetical cash distribution from CFC2).

The good news is that the effective date of Code § 960(c) is for “acquisitions of United States property . . . after December 31, 2010.”  Consequently, Congress has been kind enough to allow planning transactions for this year to extract as much lower-tier high taxed earnings as possible.

Interestingly, if a 956 loan is put in place on or before December 31, 2010, but generates 956 inclusions in years after 2010, it appears that the new blending rule may not apply.  This is because the new rule keys off of acquisitions of U.S. property after December 31, 2010.  If the loan (or other U.S. property) is in place prior to December 31, 2010, there would be no acquisition of U.S. property after December 31, 2010.

However, the new law authorizes the I.R.S. and the Treasury Department to issue regulations or other guidance to carry out the purposes of the new rule.  See new Code § 960(c)(2).

Hybrid Entities and Reverse Hybrid Entities

U.S. tax planners often refer to “hybrid entities” and “reverse hybrid entities.”  This blog entry briefly discusses the meaning of these terms.

From a U.S. tax perspective, a hybrid entity is an entity that is “fiscally transparent” for U.S. tax purposes but not fiscally transparent for foreign tax purposes.  In general, an entity is fiscally transparent if the entity’s current year profits are currently taxable to the owners of the entity, regardless of whether the entity made any distributions to its owners during that year.  (See Treas. Reg. § 1.894-1(d)(3)(ii) and (iii) for a more extensive definition.)

Partnerships are typically fiscally transparent entities.  Corporations are typically not fiscally transparent entities.  Limited liability companies and various types of foreign entities may or may not be fiscally transparent.

A reverse hybrid entity is the “reverse” of a hybrid entity in that the entity is fiscally transparent for foreign tax purposes but not fiscally transparent for U.S. tax purposes.  Entities that are treated the same for U.S. and foreign tax purposes are not “hybrid” entities.

Shown below is a flowchart/decision tree that helps determine whether an entity is a hybrid entity or a reverse hybrid entity.  The flowchart also indicates some of the special U.S. tax rules that may apply to domestic and foreign, hybrid and reverse hybrid entities. (Click here for a full-size PDF file of the chart)

Subpart F Income Partnership Blocker Update

On May 14, 2010, the Treasury Department and I.R.S. published Notice 2010-41, indicating that they intend to issue regulations that will classify certain domestic partnerships as foreign partnerships for purposes of identifying the “United States shareholders” of a controlled foreign corporation (“CFC”) that are required to include in gross income the amounts specified under Code § 951(a) (“Subpart F Income”) of such CFC.

On December 29, 2008, the Treasury Department and the I.R.S. issued Notice 2009-7, identifying a “transaction of interest” where a U.S. taxpayer (Taxpayer) wholly owns two CFCs (CFC1 and CFC2), each of which owns 50% of another CFC (CFC3) through a domestic partnership.  CFC3 has Subpart F Income.  Taxpayer takes the position that it does not have Subpart F Income inclusions with respect to CFC3 because the domestic partnership is the first United States person in the chain of ownership of CFC3.

 
In Notice 2009-7, the Treasury Department and I.R.S. indicated that they believe that the Taxpayer’s position is contrary to the purpose and intent of Code § 951.  Notice 2010-41 indicates that in these circumstances, the regulations will classify the domestic partnership as a foreign partnership solely for purposes of identifying the U.S. shareholders of a CFC required to include Subpart F Income inclusions in income.  This reclassification will cause U.S. Taxpayer to be the first U.S. person in the chain of ownership of CFC3, and will therefore require U.S. Taxpayer to include the Subpart F Income in its income.

The regulations will be applicable to taxable years of domestic partnerships ending on or after May 14, 2010.

I.R.S. Rulings on Manufacturing Branch Rule

Late last year the I.R.S. published PLR 200942034 and PLR 200945036.  Both of these private letter rulings deal with the manufacturing branch rules of Code § 954(d)(2) and Treas. Reg. § 1.954-3(b).  The rulings provide useful insights regarding how the actual effective tax rate and the hypothetical effective tax rate should be measured.

The effective tax rates are computed by considering deductions available under local law.  Consequently, deductions as interest on net equity for local law purposes are considered when calculating the hypothetical rate of tax.  The rulings emphasize that only income taxes are considered.  They also specify that the hypothetical calculation is an annual event, and may only account for items arising during that year.

Today we posted charts of PLR 200942034 and PLR 200945036 on our sister website, www.andrewmitchel.com.

Andrew Mitchel has extensive experience in applying the Code § 954(d)(2) branch rules for large multinationals and in calculating the effective tax rates to determine whether a tax rate disparity exists.

Tax Chart Shape & Color Conventions

On our sister website (www.andrewmitchel.com) we have published over 700 tax charts.  Over 600 of these charts can be viewed onscreen at no cost.  The remaining 100+ charts (and printing capabilities for the 600+ onscreen charts) can be accessed with a $200 annual subscription (See chart orders).

Many shapes and colors are used in the charts.  Heretofore, we have not published a comprehensive legend of the shapes and colors we use.  In this blog posting, we explain many of the conventions that we use on our charts.  Of course, with over 700 charts there are exceptions to these general rules.

Shapes

Shapes are used in the charts primarily to designate various types of entities.  The following shapes are used:

1. Rectangles represent corporate / limited liability entities.

2. Triangles represent partnerships.
3. Pentagons represent trusts.
4. Trapezoids represent U.S. “S” corporations.
5. Ovals represent individuals, the public, and a “catch all” other.
6. Small pink circles with a, b, and c letters represent the order that several transactions take place within one box.
7. Small triangles within rectangles represent entities treated as a flow-thru entities for U.S. tax purposes.  Other international tax presentations often use a triangle within a rectangle to represent a partnership and an oval within a rectangle to represent a disregarded entity.  Our charts do not use two different shapes for these two types of entities.  Rather, in our charts the triangle represents flow-thru status and one must look to the percentage ownership in order to distinguish between partnership status and disregarded entity status.  A 100% owned flow-thru entity is a disregarded entity and any other flow-thru entity is a partnership.

Partnerships and S corporations are typically not subject to an entity level tax.  Trusts, similarly, are often not subject to an entity level tax.  We have attempted to utilize similar shapes for partnerships, S corporations, and trusts in order to reflect their similar nature.  Thus, the top two sides of the triangles for partnerships and the top two sides of the pentagons for trusts come to a point.  Think of these two sides, if you will, as “funneling” the earnings, profits, etc. up to the owner/beneficiary.  For S corporations, the two sides of the trapezoid turn inward, similar to the tops of the triangles and pentagons.  This shape is intended to represent the same upward funneling concept.

Lines & Outlines

1. Thick, colored, dashed lines generally represent action, an agreement, or a special type of ownership (e.g., preferred stock).  Typically, matching colored text describes these lines.

2. Outlines of shapes are typically thin, black, solid lines.
3. Shapes with outlines of thin, black, dashed lines represent either newly formed entities or non-entities (such as corporate divisions, property, etc.).

Background Colors for Shapes

Generally only two colors are used as background for shapes: white and blue.  White generally means that the entity is a U.S. entity.  Blue means that the entity is a non-U.S. (foreign) entity.

Loans Between Entities

Loans between entities are generally represented by a thick, colored, dashed line with matching colored text.  Further, the lending entity has a “+” next to it, and the borrowing entity has a “-” next to it.

Recently Created Conventions

We have recently begun creating a number of charts that include trusts.  As indicated above, these trusts are represented by pentagons.  Some of the trusts are grantor trusts and some of them are non-grantor trusts.  We believe that it would be useful to have a visual cue that distinguishes between grantor and non-grantor trusts.  In this regard, we tentatively plan to represent grantor trusts with an outline of a thick, red line and to represent non-grantor trusts with an outline of the normal thin, black line.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Modifications to Section 367 in Outbound Section 304 Transactions

On February 10, 2009 the I.R.S. and Treasury Department issued temporary regulations in Treasury Decision 9444 regarding the application of Code § 367(a) and (b) with respect to Code § 304 transactions.

Code § 367(a)(1) generally provides that if a United States person transfers property to a foreign corporation in an exchange described in Code § 332, 351, 354, 356, or 361, the foreign corporation shall not be considered a corporation for purposes of determining the extent to which the United States person recognizes gain on such transfer.  Exceptions to the general rule are provided by section 367(a)(2) and (3).

Code § 367(b)(1) provides that in the case of an exchange described in section 332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of property described in section 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations.  Regulations under Code § 367(b) generally provide that if the potential application of Code § 1248 cannot be preserved immediately following the acquisition of the stock or assets of a foreign corporation (foreign acquired corporation) by another foreign corporation in an exchange subject to Code § 367(b), then certain exchanging shareholders of the foreign acquired corporation must include in income as a dividend the Code § 1248 amount attributable to the stock of the foreign acquired corporation.

Code § 304(a)(1) generally provides that, for purposes of Code §§ 302 and 303, if one or more persons are in control of each of two corporations and in return for property one of the corporations (the acquiring corporation) acquires stock in the other corporation (the issuing corporation [i.e., the target corporation]) from the person (or persons) so in control, then such property shall be treated as a distribution in redemption of the stock of the acquiring corporation. 

To the extent Code § 301 applies to the distribution, the transferor and the acquiring corporation are treated as if (1) the transferor transferred the stock of the target corporation to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which Code § 351(a) applies, and (2) the acquiring corporation then redeemed the stock it is deemed to have issued.  Under section 304(b)(2), the determination of the amount of the property distribution that is a dividend (and the source thereof) is made as if the property is distributed by the acquiring corporation to the extent of its earnings and profits, and then by the target corporation to the extent of its earnings and profits.

On February 21, 2006, the IRS and Treasury Department issued final regulations (TD 9250) providing that Code § 367(a) and (b) do not apply to a deemed Code § 351 exchange resulting from a Code § 304(a)(1) transaction, stating:

The IRS and the Treasury believe that the interests of the government are protected, and the policies underlying section 367(a) and (b) are preserved, in a section 304(a)(1) transaction without regard to the application of section 367.  The IRS and Treasury believe that, in most or all cases, the income recognized in a section 304 transaction will equal or exceed the transferor's inherent gain in the stock of the [target] corporation transferred to the foreign acquiring corporation.
An underlying assumption in the 2006 final regulations was that the deemed redemption would provide basis recovery only with respect to the basis in the shares deemed issued in the deemed Code § 351 exchange.  The preamble to the 2009 temporary regulations acknowledges that certain taxpayers may be taking the position that basis recovery is allowed on the stock of the acquiring corporation other than the stock deemed issued in the Code § 304 transaction.

The I.R.S. and Treasury are currently studying whether such basis reduction is allowable.  If such basis recovery is allowable (or claimed), the 2009 temporary regulations provide that gain will be recognized.

Specifically, the 2009 temporary regulations provide an exception to the general rule of nonrecognition if the distribution is applied against and reduces (in whole or in part), pursuant to Code § 301(c)(2), the basis of stock of the foreign acquiring corporation held by the United States person other than the stock deemed issued to the United States person in the deemed Code § 351 exchange. 

The chart below depicts the deemed steps in a Code § 304 transaction.  If, in step 2b below, the taxpayer were to claim that the deemed redemption were to not only recover basis in the deemed issued shares (the blue dotted line between P and X in box 2b), but also were to recover basis in the pre-existing shares of Corp X owned by Corp P (the black solid line between P and X in box 2b), then gain would be recognized by Corp P on the outbound Code § 304 transaction.  The gain realized would reduced by the amount treated as a dividend to Corp P.

 

For a clearer image of the chart click on the chart or see  Outbound 304 Transaction

New Tax Charts

We have published a variety of new tax charts.  A topical listing of all 600+ charts can be found at http://www.andrewmitchel.com/html/topic.html.

1. Hazeltine (Busted 351 Exchange)
2. Vitale   (Partner in Limited Partnership Engaged in U.S. Trade or Business)
3. Weikel   (351 Exchange Followed by B Reorganization)
4. Rev. Rul. 55-143   (Nonresident Alien With Funds in Bank Safe-Deposit Box At Time Of Death)
5. Rev. Rul. 69-413   (Parent of Acquiror Not A Party to A Purported F Reorganization)
6. Rev. Rul. 73-442   (DISC Single Class of Stock Requirement)
7. Rev. Rul. 73-605   (Consolidated Tax Liability-Member Payments)
8. Rev. Rul. 77-479   (Recapitalization Prior to IPO)
9. Rev. Rul. 78-281   (Non-Functional Currency Borrowing & Purchase)
10. Rev. Rul. 78-397   (Forward Triangular Merger: Circular Flow of Cash)
11. Rev. Rul. 79-150   (Conversion of Brazilian "S.A." to "Limitada")
12. Rev. Rul. 79-289   (D & F Reorganization with Liabilities Exceeding Basis)
13. Rev. Rul. 80-239   (301 Distribution Thru Conduit Entity)
14. Rev. Rul. 81-132   (Transferor Ownership Not Attributed in 351 Exchange for Treaty Purposes)
15. Rev. Rul. 81-247, Sit. 1   (COBE - Merger With a Drop of All Assets)
16. Rev. Rul. 81-247, Sit. 2   (COBE - Merger With a Drop of Some Assets)
17. Rev. Rul. 83-156   (351 Followed by 721)
18. Rev. Rul. 84-44   (Forward Triangular Merger Not Part of 351 Exchange)
19. Rev. Rul. 84-104   (Consolidation Treated As Merger In Reverse Triangular Merger)
20. Rev. Rul. 84-111, Sit. 1   (Partnership Conversion to Corporation: Assets Down & Stock Up)
21. Rev. Rul. 84-111, Sit. 2   (Partnership Conversion to Corporation: Assets Up & Assets Down)
22. Rev. Rul. 84-111, Sit. 3   (Partnership Conversion to Corporation: Partnership Interests Down)
23. Rev. Rul. 87-110   (368 Reorganization of 50% Partner Terminates Partnership)
24. Rev. Rul. 88-48   ("Sub-All" In C Reorganization With 50% of Assets Sold)
25. Rev. Rul. 92-85 Sit. 1   (FDAP Withholding on 304 Transaction)
26. Rev. Rul. 92-85 Sit. 2   (FDAP Withholding on 304 Transaction)
27. Notice 94-93   (Domestic Inversion With Disproportionate Shares Issued)
28. Rev. Rul. 96-29 Sit. 1   (F Reorganization Followed By IPO)
29. Rev. Rul. 96-29 Sit. 2   (Forward Triangular Merger Followed By F Reorganization)
30. Notice 2003-22   (Offshore Deferred Compensation Arrangement (Listed Transaction))
31. Rev. Rul. 2008-15, Sit. 1   (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
32. Rev. Rul. 2008-15, Sit. 2   (Section 4371 Excise Tax on Outbound Reins. & Fgn-to-Fgn Reins.)
33. Rev. Rul. 2008-15, Sit. 3   (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
34. Rev. Rul. 2008-15, Sit. 4   (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
35. Rev. Rul. 2008-18, Sit. 1   (S Election In F Reorg With QSub)
36. Rev. Rul. 2008-18, Sit. 2   (S Election In F Reorg With QSub)
37. Section 304 Anti-Abuse Rule   [Temp. Reg.  1.304-4T(a), Ex.]
38. Two Party Like-Kind Exchange: Partial Boot [Reg. 1.1031(b)-1(b), Example 1]
39. Two Party Like-Kind Exchange: Assumption of Liabilities [Reg. 1.1031(d)-2, Example 2]
40. Ultimate Beneficial Owners Under Derivative Benefits Test   [PLR 200201025]
41. Ultimately Owned Under Derivative Benefits Test   [PLR 200409025]
42. Outbound 332 Liquidation With 80% Domestic Subsidiary Corporation   [PLR 200448013]
43. PFIC Look-Thru For Gain on 25% Owned Subsidiary   [PLR 200604020]
44. Outbound Forward Triangular Merger With Subsidiaries
45. Swiss Treaty - LOB: Active Trade or Business Test   [Switz.-U.S. Income Tax Treaty MOU Para. 4, Ex. I]
46. U.S. Partnership vs. Foreign Partnership   (CFC vs. Non-CFC)

5 Charts of Non-U.S. Tax Cases

Today we published charts of five non-U.S. tax cases.  Although we have published over 600 charts of tax cases and rulings, prior to today we have not published charts of any non-U.S. tax cases.  Today's charts include tax cases from Canada, the U.K., and the European Court of Justice.  The cases include the following:

1. Cadbury Schweppes, PLC (2006 ECJ) (Freedom of Establishment and U.K. CFC Legislation),

 

2. Indofood International Finance Ltd. (2006 U.K.) (Hypothetical Beneficial Owner under Indonesia-Netherlands Double Tax Agreement),

 

3. Marks and Spencer PLC (2005 ECJ) (U.K. Group Relief for Non-U.K. Losses),

 

4. Prévost Car, Inc. (2008 Canada) ("Beneficial Owner" Under Canada-Netherlands Tax Treaty), and

 

5. Vodafone 2 (2008 U.K.) (Freedom of Establishment and U.K. CFC Legislation).

Attorney Andrew Mitchel is an international tax attorney that advises businesses and individuals with cross-border activities.

 

Chart of Killer Forward Triangular Merger

As promised in our June 22, 2008 posting regarding new regulations closing a repatriation loophole, we have charted the example in the newly published regulations dealing with "killer forward triangular mergers."

Treasury Issues Regulations to Close Repatriation Loophole

The U.S. Treasury Department recently issued temporary and proposed regulations under Code § 367(b) to close a loophole used by multinationals to repatriate cash from their foreign subsidiaries to the U.S. without paying tax on the repatriated earnings.

Background

On September 22, 2006, the IRS and Treasury Department issued Notice 2006- 85 (charted here), which announced that regulations would be issued under Code § 367(b) to address certain triangular reorganizations under section 368(a) involving one or more foreign corporations.  On May 31, 2007, the IRS and Treasury Department issued Notice 2007-48 (charted here), which amplified Notice 2006-85 and announced that additional regulations would be issued under Code § 367(b).

Notice 2006-85 describes triangular reorganizations in which a subsidiary (S) purchases stock of its parent corporation (P) from P in exchange for property, and then exchanges the P stock for the stock or assets of a target corporation (T), but only if P or S (or both) is foreign.  Notice 2006-85 announced that regulations to be issued under Code § 367(b) would make adjustments that would have the effect of a distribution of property from S to P under Code § 301 (deemed distribution).

Notice 2007-48 describes a transaction very similar to the transaction in Notice 2006-85, except that S purchases the P stock from a person other than P (such as from public shareholders on the open market).

The New Regulations

The new temporary and proposed regulations (Treas. Reg. § 1.367(b)-14T) apply to triangular reorganizations where P or S (or both) is foreign and, in connection with the reorganization, S acquires, in exchange for property, all or a portion of the P stock that is used to acquire the stock or assets of T.  In a triangular reorganization subject to the temporary regulations, adjustments shall be made that have the effect of a distribution of property from S to P under Code § 301. The amount of the deemed distribution shall equal the amount of money plus the fair market value of other property that S used to acquire P stock.

In Notice 2006-85 and Notice 2007-48, the transactions were structured as triangular B reorganizations (sometimes referred to as “killer B” reorganizations).  The regulations include an example (Treas. Reg. § 1.367(b)-14T(b)(4)) of another type of triangular reorganization (forward triangular merger -- Code §§ 368(a)(1)(A) and (a)(2)(D)) that could be used (if not for the new rules) to repatriate cash tax free (say, a "killer forward triangular merger").  We expect to create a chart of the example soon.

Electronic Arts Chart

We recently uploaded a chart of the Electronic Arts case that partially deals with the manufacturing exception for foreign base company sales income.  The chart can be found at Electronic Arts.  The Tax Court in Electronic Arts did not analyze in detail Treas. Reg. § 1.954-3(a)(4).  The case was a motion for summary judgment that dealt with both Code §§ 954 and 936.  The rules under these two sections may not have been perfectly in accord with each other.  In the opinion, the Tax Court stated:

petitioner's focus on certain language in section 1.954-3(a)(4), Income Tax Regs., overlooks the regulation's requirement that various actions have been done `by' the corporation being evaluated.

By "various actions," the Tax Court seems to mean "manufacturing."  Thus, "manufactruing" must be done by the corporation.  In the Electronic Arts case, it appeared that Electronic Arts Puerto Rico ("EAPR") legally and beneficially owned the raw materials, the work in process, and the finished products all throughout the manufacturing process.  It also appeared that that product purchased was substantially transformed prior to its sale.  A literal reading of Treas. Reg. § 1.954-3(a)(4) would lead one to believe that EAPR "manufactured" and that the product should have been treated as manufactured "by" EAPR.